Registered Investment Advisor – Hampton Roads, Virginia

Monthly Archives: June 2016

We have a tendency to take a dispassionate view of world affairs. It helps us avoid getting caught up in the hype that the media sells when things happen. When the unexpected happens, as it so often does, the initial reports and the initial reactions are often the opposite of the truth and have little relationship to reality.

We have some insight into European affairs for personal reasons and have always felt that the EU was an artificial construct in a continent that is home to so many disparate cultures. So we are not surprised that the whole rickety structure is showing signs of coming apart. But Europe has been the home of little countries and big countries for millennia and has thrived over that time. There’s no reason to think that the EU is either critical or even necessary. It has its uses but it also has its failures and it’s the failures that have grown larger over time. So finally, when put to a vote, the people on an island off the coast of Europe has decided it was time to declare its independence from the EU and reclaim their heritage.

We also found the commentary from Jenna Barnard of Henderson Global Investors compelling and wanted to share it.

While the result of the referendum “Brexit” last week may be the biggest political crisis in the United Kingdom since the Second World War, this is not a financial crisis in our view. Credit markets are not suggesting systemic risk at present as the banks are in a relatively healthy place due to rigorous regulation and stress testing over the last few years.

Clearly the result is a significant blow to confidence / “animal spirits” in the short term and will put a least a temporary break on growth in the UK and perhaps Europe. Bank share prices have also been hammered and their willingness to lend remains muted. European companies are therefore likely to remain relatively conservative – more about dividends and conservative balance sheets than share buybacks /M&A.

The Bank of England is planning to cut rates to 0% from 0.5% but the central bank doesn’t want to take them negative. We expect further credit easing – free money to the banks for mortgage lending (“funding for lending”), more QE possibly. We believe another central bank heading to the zero lower band fuels the global grab for yield.

The issue at stake as of today is HOW the UK exits. There are soft and hard version of exit with soft (maintaining access to the free trade area) being the preferable version for the economy. Today the leading “leave” politician in the UK (and likely the next Prime Minister), former Mayor of London Boris Johnson, has written his weekly column for a national newspaper that suggests a very soft form of exit; along the lines of Norway and Switzerland i.e. retain access to the free trade area. To do this the UK would have to agree to free movement of labor (to be clear, not people, but the labor market; new migrants would need a job to come to the UK).

We will continue to watch and advise you to events as they unfold. As we write these comments on Tuesday morning the US stock markets are up over 1% and the European markets are up over 3%. Reality is overtaking panic. If you have questions, don’t hesitate to contact us.

Today’s markets are roiled by the decision of voters in Great Britain to exit the European Union (EU), which has been dubbed “BREXIT.” As with most events in the investment world, there are people out there who make a living scaring you. Rather than panic, we recommend you step back and think rationally what this means.

First, why did the British people vote to leave the EU despite the unified opposition of both of Great Britain’s major political parties? The answer is that more than half of their voting public was tired of being told what to do by un-elected bureaucrats in Brussels (the capitol of the EU). The people wanted to have a say in how they were going to be governed. In effect, BREXIT was a revolt of the masses against the classes.

Polls prior to the election indicated that the vote would be against BREXIT, opting to stay in the EU. The result surprised much of the big money which led to today’s panicked selling at the open.

As we prepare these comments we see a small rebound from the opening bell but the day is young and we don’t know where we’ll be at the end. But if we step back, we think that Brian Wesbury of First Trust has some worthwhile thoughts:

The bottom line is that investors should ignore scare stories about what would happen if BREXIT wins. Great Britain runs consistent trade deficits with the rest of Europe. Regardless of what foreign leaders say before the vote, if the British vote to leave, the rest of the EU is going to chase them to the ends of the earth. No way will they allow one of their biggest export markets to become more distant. They will beg the UK to sign a free trade deal. In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up.

Any market volatility would be short-lived and any swing to the downside would be a buying opportunity. BREXIT is not a reason to sell. In fact, freedom is a good thing

I contribute about 10% to my 401k. I want to know more about Roth IRAs. I have one with my company, but haven’t contributed any percentage yet as I am not sure how much I should contribute. What exactly is a Roth IRA? Additionally, what is the ideal contribution to a 401k for someone making $48K a year?

Here was my reply:

A Roth IRA is a retirement account. It differs from a regular IRA in two important aspects. First the negative: you do not get a tax deduction for contributing to a Roth IRA. But there is a big positive: you do not have to pay taxes on money you take out during retirement. And, like a regular IRA, your money grows sheltered from taxes. There’s also another bonus to Roth IRAs: unlike regular IRAs, there are no rules requiring you to take annual required minimum distributions (RMDs) from your Roth IRA, even after you reach age 70 1/2.

In general, the tax benefits of being able to get money out of a Roth IRA outweigh the advantages of the immediate tax deduction you get from making a contribution to a regular IRA. The younger you are and the lower your tax bracket, the bigger the benefit of a Roth IRA.

There is no “ideal” contribution to a 401k plan unless there is a company match. You should always take full advantage of a company match because it is essentially “free money” that the company gives you.

NFL quarterback Mark Sanchez and major league baseball pitchers Jake Peavy and Roy Oswalt were allegedly cheated out of about $33 million by Ash Narayan, who worked for RGT Capital Management for nearly 20 years, the SEC has charged.

Narayan “secretly siphon[ed] millions of dollars from accounts he managed for professional athletes,” the SEC alleged.

When you hire someone to manage your money you trust that they will serve you honestly and ethically. Unfortunately, that trust is sometimes betrayed, which gives the financial services industry a black eye.

One of the things that we can pass along to our friends and clients are lessons learned. In this particular case, Narayan put a lot of his clients’ money into a struggling internet firm in which he had a financial stake. That is a huge conflict of interest and should be a red flag for anyone who hires a financial advisor.

Sanchez hired Narayan partly because they attended the same church. We have seen several instances where people entrusted their money with advisors who were part of the church, the club or another affinity group without checking further. When hiring an advisor you cannot assume that people close to you have your best interest at heart. Even family members will take advantage of other members of the family.

If you want a brochure that tells you how to choose a financial advisor, contact us. We are fiduciaries.

Like this:

New clients to Korving & Company will pay no commissions on stock and ETF trades when they open an account with us between June 16th and December 31st 2016.

We use Charles Schwab as our custodian and Schwab has made this limited-time promotion to encourage new clients to open accounts with RIA’s like Korving & Company.

The promotion is called “Make the Move” and it’s designed to:
• Give you an opportunity to experience the value and benefits of working with us.
• Execute commission-free trades to offset the cost of realigning assets to one of our portfolios.

Like this:

Consumer research tells us that investors are confused about the available options when it comes to managing their wealth. They don’t really know the difference between brokers, advisors who work for large investment firms and independent advisors. Charles Schwab is starting an information campaign to explain the value propositions of the independent (Registered Investment Advisor) RIA model by using language that resonates with high-net-worth clients.

The reason for Schwab’s initiative is stated well by Janet Stanzak, principal of Financial Empowerment LLC and the 2015 chair of the FPA.

“High-net-worth investors would much rather work with someone who takes their entire financial situation into consideration, so it makes total sense for them to be doing this.”

Like this:

And you think that interest rates are low here? You should be Japanese.

The Japanese people are paying the Japanese government to buy government bonds. The rate on 10 year bonds is minus 0.159%. Lenders are willing to pay the Japanese government for the privilege of getting back their principal, ten years from now.

Things are just slightly better in Germany. The German government bond is yielding 0.025%. That means if you lend the German government $1000 today they will give you back $1002.50 in ten years.

UPDATE: June 14th, the morning the rate on the German bond has dropped to zero.

For most people, retiring means the end of a paycheck. When you retire, how will your lifestyle be affected? If you don’t know the answer to that, shouldn’t you find out before it’s too late? There are so many things to take into consideration.

Retirement age – Modern retirees face lots of choices that their parents did not have. There is no longer a mandatory retirement age, so the question “when should I retire” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income. Apply early and you reduce your monthly benefits by 25% – 30%, depending on your age. Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year), depending on your age. If you are married, the decisions get even more complicated.

Pension – If you are entitled to a pension, the amounts you receive usually depend on your length of service. The formula used to calculate the pension benefit can get quite complicated. Those who work for employers whose finances are questionable may want to consider whether they will get the benefits they are promised. If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – More and more people go back to work after retirement. Quite a few people don’t want to stop working, but do something different. Others use their skills to become consultants, or turn a hobby into a business. A second career makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement: in IRAs, 401(k)s, 403(b)s, 457s, and individual accounts. These funds are under your control. Most retirees use them to supplement Social Security and pension income. They are the key to determining how well people live in retirement.

To find out whether you will be forced to cut back after you retire, you need a plan that allows you to take all these factors into consideration. A plan allows you to make mid-course corrections before it’s too late.

Like this:

Britains will soon be voting on whether to stay in the EU (the European Union) or leave. Polls are divided on exiting the EU, or “Brexit” for short. The British establishment is all for remaining in the EU but a lot of people are for getting out. Voters are being deluged by scare stories about what will happen if they exit the EU, everything from loss of jobs to depression. There has even been a claim that Britain leaving the EU will cause the climate to change even faster. Some have labeled the tactics “Project Fear.”

The issue driving Brexit is that people are fed up with an unelected European bureaucracy making important political decisions for them. People are seeing many of the decisions that were once made through Parliamentary democracy delegated to strangers in foreign capitals.

People are also becoming wary about a massive influx of refugees what under EU rules can move freely throughout Europe. People who do not share the cultural or political beliefs of the British and who have no wish to assimilate. We will undoubtedly be hearing more about this as the vote nears.

Brian Wesbury of First Trust has this take:

The bottom line is that investors should ignore scare stories about what would happen if Brexit wins. Great Britain runs consistent trade deficits with the rest of Europe. Regardless of what foreign leaders say before the vote, if the British vote to leave, the rest of the EU is going to chase them to the ends of the earth. No way will they allow one of their biggest export markets to become more distant. They will beg the UK to sign a free trade deal. In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up.

Any market volatility would be short-lived and any swing to the downside would be a buying opportunity. Brexit is not a reason to sell. In fact, freedom is a good thing.